INTERNATIONAL ECONOMIC GEOGRAPHY –
LOCATION THEORY III
dr Bart Rokicki
Chair of Macroeconomics and Foreign Trade Theory
Faculty of Economic Sciences, University of Warsaw
Agglomeration economies
•
•
Marshall‘s three reasons why agglomeration economies are
achieved:
1.
Information spillovers.
2.
Local non-traded inputs.
3.
Local skilled-labor pool.
Advantages and disadvantages of agglomeration economies?
Disadvantages produce dispersion!
Different agglomeration forces
•
Three types of agglomeration:
1.
2.
3.
•
Internal returns to scale: firm-specific.
Economies of localization: industry-specific.
Economies of urbanization: city-specific.
When 2 becomes 1, or 1 becomes 2? Changes in the boundary of
the firm.
•
Ex. General Motors in Detroit.
•
Fragmentation of a big firm.
Dispersion
• Do all activities agglomerate?
• If not, how do we decide
o How many centers?
o What functions in each center?
o How far apart?
• The disadvantages of the Agglomeration
(The Benefits of Maximizing Separation)
o More Competition
o Market share is reduced in agglomeration
o Congestion, pollution and crime in cities
o Reduced degree of spatial monopoly power
Urbanization
• Urbanization exploits the advantages of
agglomeration/clustering
• Enhances specialization
o Of labor
o Of cities
• Very dependent on efficient movement over space – key role of
transportation costs
No agglomeration: each consumer must travel to
different locations to purchase goods/services
With agglomeration: each consumer can travel to
just one location to purchase goods/services
Central Place Theory
• Original ideas can be traced to Walter Christaller and August
Lösch
• Interested in exploring the regularity of urban places in the
landscape but noticed that
o Places were of different sizes
o Larger places were more distantly located from each other
than smaller places
Basic principles
• All consumers need to access all goods and services
• Quantity purchased involves trade-off between
• Price of good
• Transportation cost involved in getting to the store
• Producers need to consider optimal size and pricing of goods
• Hence, beginnings of a general equilibrium problem, linking spatial
supply and spatial demand
• Regions are homogenous in sense of the consumers’ preferences,
production possibilities, population density, transport surface etc.
• Also, each region is separated from others, so no interregional trade
The Role of Transportation Costs
• Transport networks are constructed to facilitate spatial interaction,
the movement of goods, people, and information.
• Distance decay: the reduction in the flow between places
with increasing distance between them.
Automobile
trips;
Rail shipment
Demand cone
Distance
Theoretical solution
US experience
Colonization stages
USA
1) Early colonial conquest creates a
system of settlements and berthing
points along the seacoast.
2) Construction of penetration
routes that link the best-located
ports to the inland mining,
agricultural and population centers.
3) Export-based development
stimulates growth in the interior: the
growth of the feeder routes and links
from the inland centers.
Atlantic
Ocean
US experience (2)
Colonization stages
USA
4) Beginnings of interconnection
5) Transport network
interconnects all the major
centers.
6) Development of high-priority
linkages reinforces the
advantages of urban centers that
have come to dominate the
economy.
Atlantic
Ocean
Transportation and Communications
Terminal costs
Transportation costs
Line-haul costs
Terminal costs: must be paid regardless of the distance involved.
(loading, unloading, and line maintenance).
Line-haul costs: are strictly a function of distance.
(fuel costs).
Terminal costs: fixed in the short run but altered by technological
changes.
(reductions in handling costs in ports more than offset the cost of
building specialized handling facilities)
Competitive differences in transport media account
for variations in terminal and line-haul costs.
Trucks:
Low terminal costs (no highway maintenance and load and unload anywhere);
High line-haul costs (low efficiency in moving freight).
Water:
The highest terminal costs;
The lowest line-haul costs.
Railroads
Terminal costs: higher than trucks and lower than water carries;
Line-haul costs: lower than trucks and higher than water carries.
Fixed
costs
Water
Railroads
Trucks
Variable costs
What about air?
Transportation costs
Total
costs
Total cost
Linear Line-Haul costs
Terminal costs
Distance
Technological improvements lead to lower terminal costs
Transportation costs (2)
Total
costs
Total cost
Linear Line-Haul costs
Terminal costs
Distance
Investment in transportation: lower line-haul costs
Transportation costs (3)
Truck
Rail
Cost
Water
Truck
Rail
What about air?
Water
Distance
Fragmentation of production processes
Jones (2000):
“Recent decades have witnessed more than just an increase in the volume of
trade relative to incomes, since there has also been an increase in the fraction
of such trade that takes the form of intermediate goods, raw material, capital
goods, or middle products. Furthermore, production process that have
traditionally been vertically connected, so that all activity takes place in one
location, are now frequently broken up or fragmented so that regions that
are especially well suited to the production of parts of the process can now
be utilized in producing these fragments.”
Transportation and Communications
Cost
Transport Rates:
Cars
(Special crating and packing that add to
terminal cost)
Coal
(Little advance preparation for shipment)
Distance
Parts for an automobile are
shipped at a much lower rate
than for a finished car
Elasticity of demand:
cost
cost
Car
(more valuable and
less elastic)
Quantity
Coal
Quantity
Central Place Theory again
• Central place theory portrays cities as market-oriented retail and
service centers, ignoring the dynamics of production.
• Static model that does not incorporate changes over time.
• Dynamic version of the model depeloped by Isard.
• Definitions:
Market areas: area served by a central place (city).
Threshold of a good: the minimum level of effective demand that will
allow a firm to stay in business.
Range of a good: maximum distance that people are willing to travel to
obtain the good at a given market price.
Low-order goods: products with low threshold.
Spatial Demand
Price
Demand
Price
Quantity
Distance
Quant.
Range of
good
X
Dist.
X Dist.
Threshold of a good: milk and opera
Supply side
Existence of indivisibilities in the provision of certain goods or facilities.
We can neither construct 1/3 of a theater in a small village nor buy only 2
minutes of opera.
Duranton and Puga (2003)
“To justify the existence of cities, perhaps the simplest argument is to invoke
the existence of indivisibilities in the provision of certain goods or facilities.
Consider a simple example: an ice hockey rink. This is an expensive facility
with substantial fixed cost (…)
While having a community of 1,000 people share a rink is feasible, building a
rink for each of those people at 1/1,000th of the usual scale is not”.
The Spatial Impossibility Theorem
• The Spatial Impossibility Theorem states that an economy with a finite
number of locations and a finite number of consumers and firms, in which
space is homogenous and transport is costly, no competitive equilibrium
exists in which actual transport takes place.
• This is intuitively easy to understand as in such an economy transport cost
can always be avoided because production and consumption can take place
at an arbitrarily small level, without additional costs (backyard capitalism).
• In such a hypothetical world of perfect divisibility, it would be impossible
to explain why clustering or agglomeration of activities occurs (as we
observe in reality).
The Spatial Impossibility Theorem (2)
• Only if there are indivisibilities, or extra costs involved if production is
split, the location of economic activities becomes important (Starrett, 1978,
p.27): “...as long as there are some indivisibilities in the system (so that
individual operations must take up space) then a sufficiently complicated
set of interrelated activities will generate transport costs.”
• This principle is know as Starrett’s Spatial Impossibility Theorem, by
Fujita and Thisse (2002).
• Koopmans (1957) already pointed out that we can only begin to understand
the importance of location or geography for economics if we recognize the
fact that economic activities are not infinitely divisible. He commented:
"Without recognizing indivisibilities - in human person, in residences,
plants, equipment, and in transportation - … location patterns, down to
those of the smallest village, cannot be understood.”.
From the Demand Side: Hierarchy of
Central Places
1 = high
order
Metro
City
Town
1
X
2
X
X
3
X
X
X
4
X
X
X
Village
Example
Opera
house
Museum
Bank
X
Gas
station
Spatial and Hierarchical Organization
Source: McCann (2013)
Spatial Organization
• If we assume all consumers are to be served, circular market areas will
leave spaces Why? Because consumers only willing to spend a fixed
amount on any good/service
• At some point (range of a good) demand will be zero because consumer
budget exhausted
Delivered Price
Demand
Quantity
• Circular market squeezed into hexagons – now no unserved areas
Spatial Hierarchy: Multiple Goods
• Each good will have its own threshold, range
• Assignment to different sizes of communities
• Endogenous growth process – communities grow
because they offer greater range of goods and services
• End up with an hierarchy of urban areas
Christaller Urban Hierarchy
Source: McCann, 2013
`
Hexagon map
Village
Small city
Large city
Low-order goods: everywhere;
High-order goods: metropolitan areas.
Central Place Theory in the Netherlands
Lemmer
Rutten
Creil
Kuinre
Bant
Espel
Emmeloord
Luttelgeest
Marknesse
Tollebeek
Kraggenburg
Urk
Nagele
10 km
Ens
Kampen
Location
Start Planned population
Emmeloord
1946
10,000
18,976
Marknesse
1946
2,000
2,194
Ens
1948
2,000
1,618
Kraggenburg
1948
2,000
655
Luttelgeest
1950
2,000
666
Bant
1951
2,000
651
Rutten
1952
2,000
620
Creil
1953
2,000
687
Nagele
1954
2,000
1,014
Espel
1956
2,000
714
Tollebeek
1956
2,000
579
Population in 1985
Supply Side Considerations
Following Ottaviano and Thisse (2004):
1. The economic space is the outcome of a trade-off between various forms
of increasing returns and different types of mobility costs;
2. Price competition, high transport costs and land use foster the dispersion
of production and consumption; therefore…
3. Firms are likely to cluster within large metropolitan areas when they sell
differentiated products and transport costs are low;
4. Cities provide a wide array of final goods and specialized labor markets
that make them attractive to consumer/workers; and…
5. Agglomerations are the outcome of cumulative processes involving both
the supply and demand sides.
Link to New Economic Geography
• Central Place theory champions notion of an hierarchy and an
uneven distribution of activities over space
• However, it says little about the role of agglomeration
economies or externalities (see table below)
• The New Economic Geography/Geographical Economics
attempts to fill the gap
Marshall-ArrowRomer (MAR)
externalities
Jacobs
externalities
Localization
economics
Urbanization
economics
Sector-specific
spillovers
City-specific
spillovers